Deep-dive 2020-5: CNOOC Ltd

CNOOC Ltd (883 HK) a.k.a. "China National Offshore Oil Corporation" is one of the largest oil exploration and production companies in Asia. It remains a pure play upstream oil company with a high beta to crude oil prices. Bernstein calls CNOOC "Asia's largest and best managed E&P company... delivering exceptional production growth (with no dilution to equity holders)."

The company's track record is excellent. Production has grown at ~10% CAGR historically (excluding the acquisition of Nexen), and management is guiding for a 6% production CAGR in the years ahead. What's more is that CNOOC has achieved this while maintaining positive free cash flow, enabling the company to maintain a median dividend pay-out ratio of 40% without incurring any debt.

A key part of CNOOC's competitive advantage is that it has a monopoly on exploration under production sharing contracts in offshore China. It is then able to sell this oil domestically at prices tied to Brent, despite differences in crude qualit…